Kanpur Confectioneries Private Limited

On September 10, 1987 Mr. Alok Kumar Gupta, 47, Chairman and Managing Director of Kanpur Confectioneries Private Limited (KCPL), was in a meeting with his brothers, Vivek, 42, and Sanjay, 33, to decide their response to the proposal of A-One that KCPL might consider becoming a contract manufacturer to A-One Confectioneries Private Limited (ACPL). ACPL was a leading national player in the confectionery industry. It had desired to expand its supply to the market by subcontracting orders to other manufacturers. It had also desired to retain full control over the quality and production processes. It had promised the sub-contractors to compensate them adequately in terms of volume of business and conversion charges. To KCPL the advantages were in getting assured return on its investment and access to ACPL's manufacturing expertise but the disadvantages were in the possible loss of independence in decision-making, dilution of company's own brand, MKG, and family prestige.KPCL and its Background

KCPL was started in 1945 by Mohan Kumar Gupta, then 28, in Jaipur, Rajasthan, to sell sugar candies under the brand 'MKG'. Earlier he was a worker in a candy unit in Jaipur. He started his own business with the dealership of candies produced by others. With the experience gained he set up a production unit in Jaipur in 1946. Between 1946 and 1950, 30 units were set up in the unorganized sector in Rajasthan to sell a variety of candies. As competition increased the margins came down. KCPL could not compete on costs as its costs were higher than the other manufacturers. Mohan Kumar faced a financial crisis. He decided to shift production to another state and reduce costs. In 1954, he bought one and a half acres plot in Radha Industrial Estate, Kanpur, Uttar Pradesh (UP) and set up a candy making unit there. He became the first

entrepreneur to set up a candy-making unit in UP. He appointed three sales representatives to cover the entire state, establish dealership and promote 'MKG''- as a leading brand. He advertised MKG in the vernacular newspapers and on hoardings located at crossroads. To build further on his success, he established a dealer's network in the neighboring states of Bihar and Madhya Pradesh. By the end of 1960s he was a leader in candies in the northern region. He decided to invest his surplus" cash to diversify into making glucose biscuits and selling them under the MKG brand. At that time there were two large national level and six regional level manufacturers. The demand was growing at more than 15 per cent per annum. The margins were attractive. He saw the biscuits' venture "as an extension of the candy business. The process was simple and the equipments were available indigenously. Sugar was the common raw material. However, he had to arrange for regular supply of other raw materials like maida (refined wheat flour) and vegetable oil (vanaspathi). He tied up with local merchants and commenced production He rented depots in key towns for stocking the biscuits. He continued to advertise the brand in vernacular newspapers. He also advertised the brand at retail shops. The business was profitable but the acceleration of production was constrained b the scarcity of ingredients like maida, sugar and vanaspathi. He extended his range and offered cream, salt and Marie biscuits under the 'MKG' brand. In 1973-74 KCPL reached the number two position in the market with a monthly sale of 110 tonnes (1 tonne=1000 kg). Prince Biscuits, promoted by Ghanshyam Das in 1960, was the leader with a monthly sale of 130 tonnes. His plant, located at Agra, Uttar Pradesh, had a monthly capacity of 150 tonnes. International Biscuits Ltd. held the third position with a sale 100 tonnes per month. Its plant located at Mumbai, Maharashtra, had a capacity of 800 tonnes per month. It was a leading player in the Western and Eastern regions. A-One Confectioneries Limited, an overall national leader with a total capacity of 900

tonnes per month did not have a significant presence in the North. However it had a leading position in the South. In 1980-81 KCPL/s turnover in the biscuits business was Rs. 2 crare, an increase of 15 per cent over 1979-80. Its net profits were Rs. 20 lakh, an increase of 12 per cent over the previous year. In 1980-81 KCPL doubled its capacity from 120 tonnes per month to 240 tonnes per month. In 3crore and net profits to Rs. 251akh: 1983-84 its sales increased to Rs.

Technology and Operations in 1987Biscuit-making involved preparation of dough by mixing maida, sugar syrup, vanaspati, and certain preservative chemicals in a given proportion, stamping the dough to get various shapes and sizes, and baking the shapes to get ready-toeat biscuits. It is the proportion of ingredients that enabled the company to develop a secret formula. The quality of materials received was checked in a laboratory for impurities and existence of metal particles. Maida was cleaned and fed to the mixing unit manually. The sugar crystals were converted into sugar syrup by dissolving the crystals in water and heating the solution. The hot solution was cooled to room temperature and stored in cylinders. The syrup was mixed with maida and vanaspati in small mixers. The mixed dough was fed to the stamping unit and the stamped wet biscuits were fed to the oven for baking. The temperature needed for baking varied from stage to stage. The quality of biscuits depended on the carefulness with which the temperature was maintained at different phases of baking. The ready-to-eat biscuits were sent to the packing department. The biscuits were manually packed in packets of 100 grams.

In 1986-87 the average monthly production of MKG biscuits was 120 tonnes.

KCPL depended on both permanent and casual workers for its operations. there were 90 permanent employees. The monthly salary bill was Rs. 2.75 lakh. The casual workers were employed on daily basis to support activities in the packing and material-handling department. The size of casual work force depended on the volume of production. On an average, six casual workers were' employed to support one tonne of production. The daily wage rate was Rs. 50. The workers were from the local region. The prime problem in

In a ll

operations was

absenteeism. The workers used to abstain from work without notice. The absenteeism was 50 per cent. This had led to uneven production. The daily production varied between 2 tonnes per day to 6 tonnes per day. The company sought the advice of technical consultants on issues relating to capacity expansion, equipment selection and productivity improvements. The overall operations were supervised by Arun Kapoor, Manager (Operations). He was a graduate in science from a local college.

KCPL bought maida in bags of 50 kg, sugar in bags of 100 kg, and vanaspati in tins of 15 kg, from local suppliers and stocked them near the mixing unit. It bought fifty per cent of the supplies on credit (stocked at least three weeks requirement) and the rest in cash. Induction of Family Members Mohan Kumar had six sons. Alok Kumar, the eldest son of Mohan Kumar, joined the business in 1960 after completing his graduation in commerce. Vivek, the elder son, joined the company in 1965 after completing his graduation in mechanical engineering. Sanjay, the last son, joined the business in 1974 after completing his graduation in arts. The other three sons of Mohan Kumar started their own trading concerns to trade in metal parts and container. In 1982, Mohan Kumar handed over the leadership of KCPL to his eldest son. The sons of Alok,

Vivek and Sanjay were studying in school The allocation of responsibilities among the family members was clear. Alok Kumar looked after finance and liaison functions. Vivek looked after human resource management and manufacturing, and Sanjay were responsible for marketing, logisticsand administration. They did not till interfere in each other's areas. The family members met on the fifth of every month to review the operations and performance of the businesses, and think through the issues for the future. Decision-making within the family was seen by them as participative. The family members could disagree on issues without disrespect to the fraternal hierarchy. The management principles laid down by the family were - respecting the laws of the land, not exploiting labour, running business on ethical lines, treating the consumer as king, and not evading taxes. Funds Management The banker to the company was State Bank of India. KCPL was associated with this bank since 1954. The company believed in the policy of ploughing back the surplus. The family members earned a salary. MKG brand MKG was a popular brand in the Northern region. MKG biscuits were known for their quality, crispness, and affordable price. The brand was advertised in vernacular dailies and weeklies. It was also advertised on hoarding at crossroads and at the point of sale in Kirana shops located in residential colonies. The biscuits were available in standard packs of 100 grams. KCPL did not sell loose biscuits to the Kirana shop owners broke the pack and sold them loose whenever needed. The consumers were middle class families in urban and semi-urban areas. The families in metropolitan cities preferred A-One or International brand biscuits.

Canteens of institutions bought biscuits by floating competitive tenders. They placed orders on the lowest bidder. In 1986-87 KCPL had sold 360 tonnes to the small and medium sized institutions. The total demand from these institutions was estimated to be around 2400 tonnes. The large institution preferred the other three brands. Competition and KCPLs performance In 1973-74, glucose biscuits were a growing segment of the biscuit industry. Only two national players A-One Confectionaries Private Limited and International Biscuits Limited dominated the industry. However, competition increased with the setting up of 70 units in the unorganized sector between 1975 and 1980. Some of them were set up in the backyards of entrepreneurs under less hygienic production conditions. They either sold unbranded biscuits or sold them with brand names sounding similar to the leading brands. They even initiated the packaging style of the leading brands. It was apprehended by the industry that the units in unorganized sector avoided payment of taxes. The manufacturers had to pay an excise duty of 15 per cent and a sales tax of 7 per cent of sales value. During the same period eight new units were set up in the organized sector in Uttar Pradesh. In the new competitive environment, KCPL got stuck in the middle. It could not increase its prices to take care of rising costs of labor and material. It did not have the national scale to reduce considerably nor did it have the premium image to get a higher price. It could not withstand the competitive pressure. Between 1983-84 and 1986-87 its sales declined. Its capacity was rendered surplus. It incurred a loss. See Exhibit 1 for details of operating performance in 1986-87. The candy business was on the decline. Owing to increased competition from both unorganized and unorganized players the margins were under pressure.

The business had become unattractive and uncompetitive. The family members decided to close the candy line. Arrangement with Pearson Health Drinks Ltd. In 1985, Pearson Health Drinks Limited (Pearson), a multinational company selling 'Good - Health', a nourishing health drink, decided to diversify into health biscuits by building on its goodwill in the health drink market. It also decided that it would not set up its own manufacturing facility. It would outsource the supply from small and medium scale units by providing technical support. Mr. Ramakant Joshi, a consultant to KCPL, recommended KCPL's case to Pearson. He had worked with Pearson before starting his consulting company. Pearson Promised a load of 100 to 125 tonnes per month and a conversion rate of Rs.3 per kilo after reimbursing fully the cost of materials. It also agrees to allow KCPL to run its existing me lines of business. KCPL saw an opportunity to utilize its surplus capacity. It also hoped to learn new tools of quality management. It did not see Pearson as a competitor to KCPL. The agreement with Pearson was signed with their corporate office in Paris in May 1986. The initial order from Pearson was 50 tonnes. Between May 1986 and march 1987. Pearson relied on expertise of KCPL. It did not provide any technical guidance. Its officers inspected the quality of the biscuits before dispatch. The market response to Good Health biscuits was lukewarm. They were seen as high priced biscuits without any additional benefits. The customers had perceived the A-One biscuits as health and energy providing biscuits. .The price of A-One biscuits was two-thirds of 'Good Health' biscuits. A-One had stressed in its advertisements that its biscuits contained milk solids

Offer of A-one Confectioneries Limited

On September 8/ 1987 Mr. Bharat Shah, Chairman of A-One Confectioneries Limited, mentioned in the meeting of Confectioneries Manufacturers Association of India (CMAI) that his company was interested in augmenting its supplying capacity by promoting contract manufacturing units (CMU) that made biscuits for A-One according to the specifications developed by A-One. He also mentioned that his company would provide technical guidance to the CMUs and offer fair conversion charges. Mr. Alok Kumar Gupta met Shah after the conference and enquired whether he was serious about his proposal. Shah answered in the affirmative. For ACPL the CMU route was an attempt to reduce its cost of manufacturing. A-one was an overall national market leader with a reputation for quality and price competitiveness. It had not changed its prices in the last three years. It had its plants in Chennai, Tamil Nadu. Its monthly capacity in 1986-87 was 1200 tonnes. It had mechanized most of its operations and reaped benefits of large scale economies. It had introduced quality control procedures based on Japanese practices. These practices had enabled the company to minimize wastage and improve responsiveness to customers orders. It competed with both national and regional players in various biscuit segments. It had aspirations of becoming a leader in each of the regional segments. It had entered the northern segmentin 1973-74. By 1986-87 it had become a leading player with the segment with a monthly sale of 200 tonnes. KCPL was reducing to the forth position. The Proposal ACPL offered to place an initial order for producing 70 tonnes of glucose biscuits per month. It also offered to supply the pre printed packing material

with the ACPL name. It would inspect the production processes of KCPL and recommend changes in processes and equipments, if needed. The changes needed to be carried out by KCPL at its own cost. ACPL Would post two quality control officers at KCPL plants and enable KCPL to adhere to quality procedures. It would supply the / ACPL secret ingredient' to KCPL but KCPL would 'be required to buy other ingredients like sugar, maida, and vanaspati oil from one of the authorized suppliers of ACPL. A-One offered to reimburse the raw material expenses as per its norms and pay a conversion charge of Rs. 1.50 per kilo to cover the expenses on labor, overheads and depreciation. The initial contract was to be for three years. Shah had hinted that the contract would be extended if KCPL rose to the expectations of ACPL. In terms of control, KCPL would be.): required to send daily production and raw material consumption report to ACPL. Discussion in the Family Alok Kumar presented the proposal of ACPL to his brothers. There were both advantages and disadvantages. A clear advantage was in terms of avoiding marketing, brand building and distribution expenses and minimizing the business risks. It would also help them utilize the surplus capacity. The disadvantage was in the possible loss of independence. It was also feared that they might not be able to concentrate on strengthening the MKG brand built over the years. In fact the family name was dependent on the success of the biscuit line. In the early years of its growth, Mohan Kumar had the vision of emerging as a leading national brand and competing successfully with ACPL. There were also anxieties in terms of how the relationships with ACPL would work out and how ACPL's experience of managing large plants in Chennai would help in running a small plant in Kanpur. Would there be interference? Would they be asked to make additional investments in manufacturing? Was

the conversion charge fair? How would Pearson view the venture was another issue. The other questions were: what did the family members want from their business ventures? What would they like to give to their sons when they grew up? They had to decide soon as they were not sure whether other biscuit manufacturers were also interested in the opportunity and would out beat KCPL in approaching ACPL.

Exhibit 1 Details of KCPL's Monthly Operations in 1986-87

Dimension KCPL Sale Per Month (Tonnes) 120 Price Per Tonne (Rs.) 18,100 Consumption of Maida Per Tonne (in Kg) 750 Consumption of Vanaspathi Per Tonne (In Kg) 150 Consumption of Sugar Per Tonne (In Kg) 200 Price of Maida per bag of 50 Kg. 500 Price of Vanaspathi per tin of 15 Kg 520 Price of Sugar per bag of 100 Kg 1200 Preservatives and Packaqinq costs per tonne 1,000 Casual Labour cost per tonne (Rs.) 300 Waqe Rate 50 Permanent Salary Bill Per Month (Rs. Lakhs) 2.75 Interest Per Month (Rs.) 50,000 Other fixed Commitments 60,000 Source: Discussion with company executives and trade

A-One 1200 National (200 North) 19,000 700 140 190 490 500 1150 1,000 400 ' 80 NA NA NA